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Good. But good enough? The FCA’s new credit card proposals

July 3, 2017

Today, the the Financial Conduct Authority’s consultation on persistent debt and earlier intervention remedies closed. The proposals were a welcome first step towards addressing the reality that millions of people pay large amounts interest and fees, and are encouraged to build up debt that is difficult to pay off.

Action is long overdue. The proposals outlined in this consultation can make a significant difference to millions of people who are, often unnecessarily, paying significant amounts of fees and interest using credit cards for a purpose for which they are not intended.

While the aim of defining persistent debt and the interventions suggested here are welcome, we believe the timescale the FCA has chosen is far too drawn out, allowing people to spend too long paying more in interest than they need to. The decision to wait 18 months before even the mildest nudge to change behaviour, and 36 months before any more concrete intervention will (as we will illustrate below), cost consumers hundreds of pounds they need not have paid, and will continue to allow companies to facilitate the growth of debt that is detrimental to consumers.

In addition to that, the definition of persistent debt here, while a clear advance on the present situation, still allows people to pay slightly more than minimum payments over the long term (interest + 1.5% of balance, for instance) on average sized credit card debts bearing average interest and not fall into the definition (see below). These people are slightly better off than those on minimum repayments who do pay more in interest than on the principal, but barely so. We recognise that a definition of persistent debt has to be simple and communicable, and the one chosen undoubtedly meets that test. But when these just above minimum payment consumers are not included, the proposed definition is not expansive enough.

Financial capability in the UK is low . Many consumers don’t fully understand the products that they are using. And in the case of credit cards this is particularly dangerous. The minimum repayment rules mean that repayments on even large balances can be rolled over at relatively low cost – but without significantly paying down the balance and incurring significant interest. So a broad swathe of credit card consumers can be lured into a vulnerable situation where they are making damaging financial decisions without it ever reaching a crisis point. We ask the FCA to look at regulations that would help this wider segment avoid taking on large debt and paying more than they have to in fees and interest.

The proposals here are a marginal improvement on the current situation. But the FCA presents no vision for how the credit card market ought to work. Before regulating the market, regulators ought to have an idea of what a product is for. When they were first conceived, the idea of credit cards being used as ongoing, long term debt facilities with very low levels of repayment would have been completely alien. Over time they have developed into this different kind of product through innovative practice of firms. Instead of beginning from where the market is operating and seeking marginal improvement, the FCA should work out what type of credit card market would best serve consumers and regulate from there.

In the high cost, short term credit (HCSTC) market, the FCA has introduced interest rate and total repayment caps, but has tended to be far more sanguine about the £70bn credit card market. Interventions in the HCSTC market have had the effect of drastically reducing the size of that market , and there is clearly not the political appetite for doing the same in the credit card market.

However, as the Interim Report found that the market is profitable for every segment of consumers aside from those in arrears, there is much less danger of market shrinkage and waterbed effects resulting from legislation than was the case with HCSTC. Given this, we do not see justification for either the length of time before the FCA’s suggested interventions or the lack of consideration of stronger interventions such as higher mandatory minimum repayments or capping total interest payments.

The suggested interventions themselves are welcome, but too much is left to the discretion of firms. We believe this will not provide the guarantee of protection that consumers need and facilitate an inconsistency of practice that will be difficult to communicate and will confuse consumers.

Our proposals: A higher ratio, a shorter time and a duty to monitor growing debts

Any definition of persistent debt is inadequate if it does not include people are paying only slightly above the legal minimum and who will be paying nearly as much in interest as they will on the balance if their behaviour does not change.

We argue that:

a. The period of time over which debt is deemed persistent ought to be reduced to 6 months, with the further scheduled interventions at 12 and 18 months.
b. The FCA ought to explore and run cost benefit analysis on higher ratios of repayment or principle to interest, ultimately adopting a stricter threshold.

Credit card companies should be required to monitor customers whose balance is consistently increasing month on month, and intervene even where those consumers are not paying large amounts in interest or charges.

The voluntary commitments of the industry to reform unsolicited credit limit increases, requiring opt-in from those who have paid minimum payments for 8 months, and cutting off all increases to those who do so for 14 months will do something to help this. But as with the other proposed rules, this only captures a small segment of consumers. Those who pay slightly more than minimum payments will not be captured, even if they are building up levels of debt they will find it difficult to repay, will be unaffected by any changes.

We call on the FCA to look into tightening these rules and come forward with preventative mechanisms to not only prevent consumers paying more than they have to in fees and interest, but to prevent them from building up problematic levels of debt.